The Carbon Tax Act

The first piece of enacted legislation directly inspired by South Africa’s need to reduce carbon emissions, this act came into force on 1 June 2019. Evoking consternation on both sides of the fence, opponents say it will stifle business and harm the economy by driving up the costs of doing business. Climate activists say it won’t change our trajectory towards a lower carbon economy quickly enough. The tax rate is considered low by global standards, and the scope is fairly limited initially.

Phase one of the implementation of the act (from now until December 2022) sees relatively modest effects coming into play. According to Treasury, only Scope One emissions will be taxed– those who own or control direct sources of emissions. Obvious examples are Sasol, fuel refineries, mining and certain large manufacturing concerns. Depending on a number of factors, tax payable will range between R6 and R48 per ton of carbon dioxide equivalent. A number of allowances are built into the act that reduce tax liability, including incentives to adopt measures to reduce greenhouse gas (GHG) emissions.

The implication of Treasury’s announcement is that Scope 2 and Scope 3 emissions could well be taxed after December 2022. These are indirect emissions, with Scope 2 covering the emissions arising from energy purchased, for example, the emissions linked to the electricity that is bought by a business. Scope 3 emissions are all of those that occur in an enterprise’s value chain, upstream and downstream. An example would be the emissions generated in the manufacturing of equipment that is purchased.

Eskom is exempt from taxation under this act during phase one, the rationale being that it is already paying via an electricity generation levy and a renewable energy premium for power purchased from independent power producers (IPPs). Good news there for customers of the parastatal, who would no doubt end up footing the extra cost.

There is no such good news for buyers of petrol and diesel, who can expect to pay an extra 9 cents per litre as a result of the tax levied on fuel producers. The effect of fuel price increases on all levels of the economy is well known.

Significant emitters should also expect to see increased policing of compliance with the National Greenhouse Gas Emissions Reporting Regulations. In effect since April 2017, these regulations, falling under the Air Quality Act, and the required emission reports will be used to quantify taxes to be paid.

The Climate Change Bill

Eleven years after the Climate Change White Paper sent the first policy signals from government, the Climate Change Bill was tabled for comment in June 2018. Comments closed in August 2018 and according to the Department of Environmental Affairs, (DEA) the bill was scheduled to be presented to Cabinet by June 2019. It remains to be seen what changes will be made to the bill after this date.

Much of the act is administrative and deals with the setting up of frameworks and the devising of appropriate plans at national, provincial and local government levels. These give us no quantifiable indication of what impact the eventual act will have on business. Chapter 5, however, (“Greenhouse Gas Emissions and Removals”), could well result in financial and operational implications.

The minister is obliged to establish a binding National GHG Emission Reduction Trajectory. Empowered through the requirement to set Sectoral Emissions Targets (SETs) for all sectors and sub-sectors, the minister will effectively allocate targets for applicable sectors and sub-sectors. The ball then gets passed to those ministers responsible for the identified sectors and sub-sectors, and they need to establish Sectoral Emission Reduction Plans (SERPs). Future regulations will determine how the SETs and SERPs are policed, and with what targets.

Provincial MECs responsible for the environment, and mayors, are compelled to support SETs through locally applicable and relevant Climate Change Response Plans.

A more generalised mechanism, the Carbon Budget, will operate in parallel to the target reduction system. Potentially a more immediate tool, carbon budgets will be allocated to all persons (including companies) who emit beyond a certain threshold level. Here we see a potentially powerful limitation on those whose emissions are not consistent with the reduction trajectory. These entities will also have to submit greenhouse gas mitigation plans demonstrating their commitment to staying within their carbon budget.

The timing for establishing the trajectory, targets and budgets is unclear, and the “when” and “how much” will be a more clear indicator of just how committed the state is to curbing emissions activity. It is worth noting that the emission trajectory needs to be determined with reference to the country’s international obligations, and we will probably see pressure from the global community turning up the heat.

The pressure from increased policing of existing laws

The most immediate pressure on certain types of business is already coming from existing laws which, while they haven’t essentially changed, are being used more assertively as the awareness of climate change and the evolving science is influencing culture and the standards of environmental protection.

Arguably the most advanced climate change litigation matter in South Africa, the case of Earthlife Africa Johannesburg and Another vs Department Of Environmental Affairs, Thabametsi Power Project (Pty) Ltd and Others is illustrative. After going through phases of challenging procedural and administrative issues, the applicants are now challenging the rationality and appropriateness of granting environmental authorisation for the proposed Thabametsi coal-fired power station This is a venture by a privately-owned IPP which is finding its ambitions being met with formidable and perhaps unexpected opposition.

Using the latest report from the UN Intergovernmental Panel Climate Change (IPCC), along with other local and global reports, the environmental NGOs have built a solid case that the government is acting irrationally and illegally by allowing another coal-fired plant to be built. The outcome remains to be seen, but it seems the days of ignoring the need to curb GHG emissions are numbered.

Both the legislation used in this matter (the National Environmental Management Act) and the Constitution don’t specifically single out climate change as a harm that needs to be avoided, but it is becoming generally accepted that this is major risk, and business will have to take it into account when seeking environmental authorisation for intended activities.

An emerging culture

As the legal net tightens, the business community will respond to ensure compliance and legal risk management. Audits will happen, not only for the enterprise itself, but also its suppliers and partners. Reduction plans will be formulated and implemented. Scorecards and rating systems will be developed, and training and awareness programmes offered.

Whether through legal compulsion or the desire to do the right thing, clients will start demanding climate friendliness from those with whom they transact. We are inexorably approaching a situation where protecting the bottom line and protecting the climate are going to mean the same thing. DM

Brandon Abdinor is an attorney and mediator practising in Johannesburg. He also consults on dispute resolution, environmental governance and best practice.